European markets have continued to look weak, with the FTSE100 and DAX falling to one-month lows after the latest economic numbers from China saw worse than expected retail sales and industrial production data for July.
Europe
Set against already low expectations the data undershot these, with a modest rate cut from Chinese authorities doing nothing to assuage concerns about the outlook for the Chinese economy, and ergo the global economy.
The usual suspects have borne the brunt of today’s weakness with basic resources, energy and financials all sliding back.
Legal & General shares have slipped back, despite raising the dividend and reporting a solid H1 performance. The declines appear to be in response to a decline in assets under management in its investment business in the same way as we saw a similar fall from Abrdn last week, with the whole sector feeling the pain today, with Phoenix Group, M&G and Hargreaves Lansdown also lower.
We’re also seeing weakness in Glencore, Antofagasta and Anglo American
There hasn’t been much to cheer about today with today’s UK economic data pointing to the idea that interest rates may well have to stay higher for longer, as well as go even higher from where they are now.
On the plus side, Marks & Spencer shares have jumped to their highest levels since January 2022 after upgrading their full year forecasts for profits today. The upgrade came against a backdrop of a strong performance in its food business, which saw like-for-like sales rise 11%.
Clothing and home sales was slightly more subdued with like for like sales rising by 6%, with the retailer warning that a tightening consumer market could act as a headwind into the year end. This has helped the likes of some in the retail sector to outperform, with JD Sports, Frasers Group, B&M European Retail and Next holding up reasonably well. B&M is also said to be in the frame to buy some of the Wilko stores, which fell into administration earlier this month.
US
US markets have taken their cues from today’s weakness in European markets, opening lower even as retail sales for July came in at 0.7%, beating expectations of a rise of 0.4%. The control group measure which goes into GDP rose by 1%, comfortably beating forecasts of 0.5%, and feeding into the narrative of a US economy that is still resilient, despite higher rates.
The latest Q2 numbers from DIY retailer Home Depot support this narrative of a resilient consumer, with revenues and profits coming in ahead of forecasts. Back in May the company cut its full year forecasts sending the shares sharply lower. Q2 revenues saw a modest decline from last year to $42.9bn, as same store sales growth declined by -2%. Profits also beat consensus coming in at $4.65c a share. The outlook for the second half of the year is more uncertain with the company reaffirming its guidance from May for same store sales. Same-store sales for the year to decline between 2% and 5%. The retailer also outlined a new $15bn share buyback.
This resilience also feeds into a narrative that rates will need to stay higher for longer to ensure that inflation remains in check. Consequently, the rise in rates, with the 2-year yield briefly popping back to 5%, before retreating is prompting some haven buying.
Nvidia on the other hand appears to be making some early gains after being on the receiving end of an upgrade from Morgan Stanley based on increased demand for AI chips ahead of its Q2 earnings update which is due next week. The shares were also boosted by filing data from David Tepper’s Appaloosa hedge fund which raised its stakes in the chip maker, as well as increasing its stakes in AMD, Amazon, Apple, and Meta Platforms, while cutting Tesla.
FX
It’s been a mixed day for the US dollar with the commodity currencies sliding back on the China slowdown story, with the Australian and Canadian dollar both under pressure.
There was always the likelihood that today’s unemployment and wages numbers would give the Bank of England a headache when it comes to deciding what to do when it comes to further rate increases, in the coming weeks. Today’s wages numbers have not only done that, but turned it into a migraine, with the pound holding up well, and UK 2-year gilt yields pushing up towards 5.2%.
UK wages for the 3-months to June surged to new record highs of 7.8%, prompting financial markets to price in the prospect of multiple further rate hikes from the Bank of England, when they next meet in September. Of course, this could all change tomorrow when UK CPI for July comes in and if as expected falls below 7% to 6.7%.
While the Bank of England will no doubt fret about this, they need to be careful not to overreact given food price inflation is still elevated at 12.7%. This convergence between wages and prices is long overdue and will help consumers reset their finances at a time when interest rates are still rising, and the lag effects of previous rate hikes have yet to be felt. There is also the risk that in raising rates now they will push rents higher, and thus make inflation stickier.
The unemployment numbers have shown that while the labour market is tightening it is also slowing, which raises the prospect of a policy misstep. We still have two more CPI reports and one more job report to parse before the Bank of England must take another decision on rates, so there is plenty of room for another shift in market thinking on further rate rises.
Commodities
Gold prices slipped below $1,900 an ounce, towards the lows seen in June, after US retail sales rose by 0.7% and sent US yields to their highs of the day, although the retreat in yields has seen prices rebound off the lows of the day.
Crude oil prices have continued to slip back from their 6-month highs from last week, after this morning’s economic numbers out of China pointed to a much deeper malaise in the Chinese economy. Optimism over a demand recovery, along with production cuts from Saudi Arabia which had driven the rebound from the June lows, appears to be colliding with the reality of a potential prolonged China slowdown, which could see prices fall back towards $80 a barrel.
Natural gas prices have continued to move higher on the back of concerns over strike action in Australia which could see 10% of the global market affected by interruption in the event of a walkout.
Volatility
A strong start to the week for tech stocks saw the NASDAQ advance more than 1% during the day, leaving it as one of the most active equity indices for the session. One day vol printed 17.38% against 16.41% for the month, although the picture across stocks globally was less than consistent. The ASX disappointed on Monday with the continued gloomy assessments out of China taking a toll on the market, leaving one day vol on the Australian benchmark at 12.54% against 11.1% for the month.
Palladium prices slumped on Monday as the metal gave back gains posted in the latter part of last week. Broad based macroeconomic factors appear to be in play here, but this did leave the asset as the most active within the commodities space. One day vol printed 42.26% against 34.48% for the month.
Oil distillates remain active too, with price pressures broadly persisting on the downside. Low Sulphur Gas Oil’s slide on Monday resulted in one day vol of 37.2% against 34.36% for the month, whilst the underlying for US Heating Oil followed a similar path, resulting in one day vol of 34.63% against 32.44% for the month.
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